In a recent decision, the Paris Court of Appeal1 refused to enforce an LMAA arbitral award on the basis that the underlying contract was affected by illegality on account of corruption.
Pursuant to article V of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, a national authority may refuse to enforce or recognise a foreign award on certain limited grounds, including where it would be contrary to the public policy of the country concerned.
On the question of public policy, the approach of the French civil courts is not to look to the domestic concept of public policy.2 Instead, the Paris Court of Appeal has developed the narrower concept of international public policy, enshrined in the French Code of Civil Procedure. This concept comprises a body of rules and values, the violation of which the French legal order will not accept, even where a matter is international in nature. For this reason, the French civil courts will refuse enforcement where there has been a failure to adhere to international public policy, although the courts usually place a high burden of proof on the contesting party, requiring it to demonstrate that any violation is flagrant, effective and concrete.
In the case in question, proof of the violation was straightforward. During the appeal proceedings, the competent French criminal court found that corrupt practices had occurred.
A Swiss seller and a French buyer entered into a sale contract for a consignment of granular urea with an approximate value of US$8.5 million. The cargo was discharged at its African destination, but there was a delay in the discharge. The Swiss seller claimed demurrage and commenced arbitration under the LMAA rules.
The arbitral tribunal issued an award against the French buyer in the amount of US$1 million. The Swiss seller obtained a court order to enforce the award in France, but the French buyer appealed the order.
As noted in the Court of Appeal’s decision, at the outset of the arbitration process, the French buyer had filed a complaint against the Swiss seller and one of its own employees, alleging corruption. The complaint ended up being heard before the French criminal courts. In the criminal proceedings, it was alleged that, alongside the sales, the Swiss seller had made significant payments to the French buyer’s employee, into offshore accounts, without the French buyer’s knowledge. These payments amounted to €850,000 over 18 months. In return, the employee had selected the Swiss seller for about 80 per cent of the French buyer’s purchases, but without any prior tender and without negotiating proper terms, notably in respect of demurrage - the laytime allowed for discharge at the port concerned was unrealistic.
While the appeal proceedings against the enforcement order were still pending, the French criminal court found the Swiss seller and the employee guilty of corruption. The Swiss seller did not appeal this decision.
On 27 September 2016, taking account of the criminal court’s decision, the Paris Court of Appeal overturned the initial enforcement order on the ground that recognition or enforcement of such arbitral award would be a flagrant, effective and concrete violation of the French concept of international public policy.
This case is a classic illustration of a public policy violation preventing reliance on an arbitral award. The conviction by the French criminal court left the Paris Court of Appeal with little option other than to refuse enforcement. The sale contract was tainted owing to corruption, which justified this refusal in the eyes of the Court. However, the Court of Appeal took care to expand on the causal link between the corrupt practices and the loss suffered by the French buyer.
This case is also a reminder that, in the event of corruption affecting an underlying contract, a challenge may be made at any stage of the dispute resolution process, be it before the arbitral tribunal, in annulment proceedings or at the point of enforcement.
How Reed Smith can help
Reed Smith can assist in reviewing contracts where arbitration is included as the preferred dispute resolution mechanism. Reed Smith can assist in filing requests for arbitration and in prosecuting and defending arbitral proceedings. Reed Smith can also assist in filing annulment and enforcement proceedings in respect of international awards.
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- Paris Court of Appeal, 27 September 2016, no. 15/12614
- In this regard, the approach of the French civil courts contrasts with that of the administrative legal order; see the client alert from December 2016, ‘Annulment of international arbitral award: the French Conseil d’Etat makes first foray into the fiefdom of the civil Cassation Court'
Client Alert 2017-006